February 08, 2009

Save it all

Two narratives seem to be forming to describe the underlying causes of the financial crisis. One, as outlined in a New York Times
front-page story on Sunday, December 21, is that President Bush
excessively promoted growth in home ownership without sufficiently
regulating the banks and other mortgage lenders that made the bad
loans. The result was a banking system suffused with junk mortgages,
the continuing losses on which are dragging down the banks and the
economy. The other narrative is that government policy over many
years--particularly the use of the Community Reinvestment Act and
Fannie Mae and Freddie Mac to distort the housing credit system--
underlies the current crisis. The stakes in the competing narratives
are high. The diagnosis determines the prescription. If the Times
diagnosis prevails, the prescription is more regulation of the
financial system; if instead government policy is to blame, the
prescription is to terminate those government policies that distort
mortgage lending.

There really isn’t any question of approach is factually correct: right on the front page of the Times edition of December 21 is a chart that shows the growth of home ownership in theUnited Statessince 1990. In 1993 it was 63 percent; by the end of theClintonadministration it was 68 percent. The growth in the Bush administration was about 1 percent. The Times
itself reported in 1999 that Fannie Mae and Freddie Mac were under
pressure from the Clinton administration to increase lending to
minorities and low-income home buyers--a policy that necessarily
entailed higher risks. Can there really be a question, other than in
the fevered imagination of the Times, where the push to reduce lending standards and boost home ownership came from?